Personal services income
Income earned mainly from your own skills and effort, subject to rules limiting deductions and income splitting.
PSI rules apply where more than half of the income from a contract is for your personal skills, labour or expertise rather than for materials, equipment or a business structure.
If the rules apply and you do not qualify as a personal services business, income earned through a company or trust is attributed back to you personally, and deductions are limited to roughly what an employee could claim.
You escape the rules by passing one of several tests, the most common being the results test or the 80% rule combined with having multiple unrelated clients.
Why a company does not always help
An IT contractor with a single client invoicing through a company may find the profit attributed back to them personally, removing any benefit from the company tax rate.
The bit people get wrong
Setting up a company does not sidestep PSI. The rules were written precisely to stop that, and they look through the structure to the substance of how the income is earned.
Common questions
Does PSI apply to me?
If more than half your contract income rewards your personal skills and effort, it likely does unless you pass one of the personal services business tests.
What is the 80% rule?
If 80% or more of your PSI comes from one client, you generally cannot self-assess as a personal services business and the rules apply.
Can I still claim deductions?
Yes, but limited to what an employee doing the same work could claim. Payments to associates for non-principal work are specifically denied.